Russia and the necessity for a new economic policy (Séminaire Franco-Russe)

Kindly translated by Anne-Marie de Grazia

Today, Russia is facing a particular stage in its economic history.  Having recovered rapidly from the 2008-2009 crisis, it must now confront a new situation where growth is slowing down sharply. This is in part a result of the impact of the crisis which the Eurozone is going through. Europe, including of course the Eurozone, being the first trading partner of Russia by far, securing over 50% of trade. But this is only one part of the story. The slow-down in growth exhibits some worrisome aspects, the more so if one harks to the assessment of the Institute of Forecasting of the National Economy (IPEN-ASR): “weak rates of growth together with a contraction in investment and a strong deceleration of the real income of households are absolutely unacceptable for a modern development of Russia” [1].

Graph 1


Sources : ROSTAT, data base.

And this is indeed what we are heading for, if we are to believe the data from ROSTAT. Which raises the problem of the diagnosis that can be made about the state of the Russian economy today.

I. What diagnosis.


The Franco-Russian Seminar on the financial problems of the economic development of Russia which took place in Paris from June 24 to 26 on the premises of EHESS showed what crucial role investments could be playing in that country as an engine of growth. But their development will have to occur within the framework of a widely reoriented political economy. The necessity for such a reorientation is obvious, not only because of the present weakness of growth, but because development will have to occur in a troubled international context, from the economic standpoint – evidently the recession in which the Eurozone is plunged is having negative effects on the Russian economy – as well as from the political standpoint.

Russia is presently faced with a genuine choice in economic policy. The necessity for such a change is upheld by many Russian economists, from Sergei Glazyev to Victor Ivanter, the latter a participant at the Seminar. One commonly criticizes previous policies in order to justify the necessity of a change in direction. Yet, though it is clear that the economic directions of this past decade have not necessarily been the right ones, the need for change does not stem from past errors but from the fact that the previous policies have worn out most of their effects.

The economic policy put into place from 2004-2005 has evolved out of the one which had imposed itself on Russia beginning in September 1998, in the wake of the grave financial crisis which the country had experienced. At first, priority was given to reclaiming the economic activity which had been destroyed during the years 1994-1998, as well as to the reduction of the government debt.

This had allowed Russia to pull itself back up extremely rapidly and to repay part of its debt in advance. The discussions starting at the end of 2004 and which translated into changes in 2005 did not call into question the broad directions taken after 1998, but would give higher priority to increasing the incomes of households and provide some impulse to public investment. In fact, and with the help of the strong rise in commodity prices occurring at the time, the country succeeded in pulling a large part of its population out of destitution. This is one of the effects of the policies lead under the presidency of Vladimir Putin [2].

In the years 2004-2008, then, we witness a “boom” in consumption occurring, signaling the emergence of a middle class. But this is also the time when we see a strong rise in labor productivity taking place. In fact, the economy of Russia underwent a mighty change during those years and the image of  “stagnation” aired through declarations by President Dmitry Medvedev could not be more misleading.

As a matter of fact, far from “stagnating” as had been the case at the end of the 1970s and during the 1980s, the economy has undergone a very important progression in labor productivity. And this indeed allowed it to resist the effects of the reevaluation in the real exchange rate. We notice that, during these years, the gap between the exchange rate and purchasing power parity (PPP) goes from 2.5 to 1.5. Which, by the way, should have translated into a drop in growth, as was pointed out at the Franco-Russian Seminar  by Anton Moiseev of the institute of economic forecasting (INP-RAN). But, in reality, when related to  the productivity gains, this gap has moved only little and remains still today slightly above 2.

Graph 2

 Russie-Prod du Trav.giff - copie

Source : ROSTAT, data base.

Yet during the same time, Russia carried on with an extremely restrictive financial policy, leaving behind investments in infrastructure. The combination of these two facts remained concealed by the strong growth occurring during the years 2006-2009. Even if Russia sailed through the crisis better than its neighbors, the much perturbed economic context began to weigh on growth and its pace has sharply decreased since the summer of 2012.  In this regard, Russia appears as a collateral damage of the crisis in the Eurozone.

Even more disturbing is the drop in investments. This is particularly important because the country is beginning to face serious problems in connection with the lack of upkeep of its infrastructures. The question of the technological risk induced by a shortcoming in investments in this domain has been stressed  repeatedly by Alexander Nekipelov, who was vice-president of the Academy of Sciences for many years.   From this point of view, one can isolate the following seven factors slowing down growth in Russia, despite good initial conditions, and their deleterious effects add to those of a degrading international conjuncture:

  • (i) The lack of financing for the renewal of a great part of the housing stock, as well as of infrastructures.
  • (ii) An extremely high level in technical and technological heterogeneity of the fixed capital,  merely expressing the weight of the “ten lost years” in Russia, as a consequence of the first phase of transition from 1988 to 1998. [3].
  • (iii) A bad institutional framework for organizing interactions between innovators and inventors of new techniques and technologies, and investors.
  • (iv) A monetary policy whose only goal is to maintain the stability of the exchange rate of the Ruble.
  • (v) An excessive social inequality, translating into the fact that the 20% richest households accumulate 47% of total income.
  • (vi) A deep-running regional unequality.
  • (vii) The insufficient development of the institutions of the legal system [4].

These factors exert a negative influence on the development of the economy but also of society as a whole.


II. The necessity of thinking a development strategy based on investments.


These influences can only be fought against if Russia finally gets around mobilizing the resources at hand and making investment into a true national priority [5]. The potential for  strong growth does exist in Russia. This potential comes from the combination of a powerful natural and mining resources sector, and processing industries with must develop in order to meet the demands in consumption of a society emerging from penury.

The necessity of a true investment strategy is thus affirmed. The level of investment, and especially its distribution, by sectors as well as by regions, must allow for a rapid development in GDP.

In return, a GDP growing at a high speed will attract new investments. The example of the Russian automobile market, today one of the first in Europe, is enlightening in this regard. The investments of foreign companies in order to produce in Russia lead to further investments on the side of their subcontractors, but also on the side of the suppliers of commodities (metals and plastics) used in automotive construction.

Implementing structural changes in order to put into place a growth pulled by investments is today a pressing necessity. The goal is therefore to rebuild a coherent and consistent industrial fabric allowing to balance out the weight of the sector of natural and mining resources.

The announcements which have been made at the Economic Forum of Saint-Petersburg which took place just before the Franco-Russian Seminar indicate that some awareness has occurred on this point. During this forum, it has been decided to commit considerable amounts (to the tune of 13 billion euros) for three projects which mark only the beginning of this policy:

  • 1. A restructuration of the Trans-Sibirian.
  • 2. The building of a TGV line between Moscow and Kazan.
  • 3. The construction of a third belt highway around Moscow.

These programs are in the wake of projects already running. They should prolong themselves into projects relating to investments in Eastern Siberia as well as in the Far-East, a point on which M. Dmitry Kuvalin (INP-RAN) has insisted during the Franco-Russian Seminar. But the branch-wise spread of the investments reveals the existence of some problems.

Graph 3

 Invest - copie

Source : ROSTAT, base de données.

If investments have sharply progressed in branches such as electronic components and office automation, they have also very strongly increased in basic chemistry. But they remain weak in the branch of machines and equipments and in metallurgy, activities in which Russia has strong natural advantages. An even more important point resides in the distribution of investments according to type. The share of the building industry remains high, not only for housing but also for buildings for commercial and industrial use, whereas the share of machines and transportation equipment tends to diminish.  This is disquieting because it implies that the investments which are really capable of carrying through the modernization of the means of production remain limited.

From this point of view, the innovations existing in the Russian economy are still at pains to translate into new equipments. One should therefore not only increase the general level of investment, but re-center it around what’s essential. It is the price to pay if Russia is to be able to experience the strong growth it needs, keeping its eyes on the horizons of 2020 and 2030.

Table 1

Projections for growth in Russia, %






Gross Domestic Product





Final conseumption expenses :





Of which : households










Non-profit institutions  serving households





Gross capital formation





Of which gross fixed capital formation















Source : V.V. Ivanter (edit.) THE NEW ECONOMIC POLICY – THE POLICY OF ECONOMIC GROWTH, Mimeo, IPEN-ASR, Moscou, Mai 2013.

Graphique 4


Source : ROSTAT, base de données

III. The financial institutions Issue.


There arises the question of what monetary policy could accompany such a change in orientation.  Today, in fact, the Russian Central Bank remains faithful to its strategy of « targeting inflation, » a strategy which is most questionable in its principle as well as in its application in Russia [6].

Oleg Govtvan has shown, during the Franco-Russian Seminar,  that the policy of the Central Bank has indeed succeeded in adequately supplying banks with liquidities, allowing them to carry on their base functions, but that it had by no means decreased interest rates, which remain very high, especially when enterprises cannot propose assets in high liquidity as collateral. It becomes apparent that, under such circumstances, banks will not be able to finance investment.

But the departure of M. Kudrin from the Ministry of Finance, the replacement of  M. Ignatiev by  Mrs Nabiulina at the head of the Central Bank signal that we are coming to a turning point.

Yet, the development of a global investment strategy necessarily implies that one raise the question of the innovation content of this investment. From this standpoint, if it is evident that the sector of military industries has an important part to play, one also needs to grasp that innovation implies processes of hybridization between various activities which are not favored by the atmosphere of secrecy which reigns in the military sector. The Russian economy will have to learn to walk on both feet, with a strong contribution from the military sector but also with the development of new innovating enterprises having come forth from the big universities and research centers.

[1] V.V. Ivanter (edit.) THE NEW ECONOMIC POLICY – THE POLICY OF ECONOMIC GROWTH, Mimeo, IPEN-ASR, Moscou, Mai 2013.

[2] Sapir J., « Rossija posle Putina :Ekonomitcheskie i Social’nye Osnovy Polititchekoj Stabil’nosti » [La Russie après Poutine. Fondements économiques et sociaux de la stabilité politique] in N. Lapina (ed). Dva Prezidentskih Sproka V.V. Putina. Dinamika Peremen, Éditions de l’Académie des Sciences de Russie, Moscou 2008, pp. 112-142.

[3] On this point Sapir J. (edit) La Transition Russe, Vingt Ans Après, (avec V. Ivanter, D. Kuvalin et A. Nekipelov), Éditions des Syrtes, Paris-Genève, 2012. Russian translation Rossijskaja Transformacija – 20 let spustja, Magistr, Moscou, 2013.

[4] V.V. Ivanter (edit.) THE NEW ECONOMIC POLICY – THE POLICY OF ECONOMIC GROWTH, Mimeo, IPEN-ASR, Moscow, May 2013.

[5] See Sapir J., “La Russie à la recherche d’une stratégie de croissance”, note published on the carnet Russeurope le 24/11/2012, URL:

[6] Sapir J., « Russia and the “new monetary consensus” note published on the carnet Russeurope le 11 novembre 2012,

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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